NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded Argentina's long-term foreign currency (FC)
Issuer Default Rating (IDR) to 'CC' from 'B' and the short-term IDR to
'C' from 'B'. All securities issued under international law have been
downgraded to 'CC' while both FC and local currency (LC) denominated
securities issued under Argentine Law have been downgraded to 'B-'.
Fitch has also downgraded Argentina's LC IDR to 'B-' from 'B'; the
Outlook on the LC IDR is Negative. The Country Ceiling has been
downgraded to 'B-' from 'B'.

The downgrade of the long-term foreign currency IDR reflects Fitch's
view that a default by Argentina is probable. The increased probability
that Argentina will not service its restructured debt securities issued
under New York law on a timely basis reflects US District Judge Griesa's
decision on Nov. 21 to remove the stay order on the ruling that
Argentina must pay US$1.33 billion to holdout investors concurrent with
or prior to its payments due to holders of the 2005 and 2010
restructured debt. The stay order will be removed with effect from Dec.
15.

Argentina is due to pay approximately USD3 billion of GDP-linked
warrants on Dec. 15, 2012. A missed payment on the GDP-linked warrants
could trigger a cross default on all exchanged debt securities issued
under international law. Subsequently, a missed coupon payment of any
other external securities would also trigger a cross default on all
exchanged bonds issued under international law.

Following the US Court of Appeals decision to uphold Judge Griesa's
ruling that Argentina breached the 'Equal Treatment Provision' of the
original New York-based law bonds that defaulted in 2001, the court
remanded the case back to Griesa for specific clarifications on how the
ratable payment formula would work and to which third parties the
injunctions should apply. On Nov. 21, Judge Griesa explained that the
clarifications requested of his court by the superior court 'did not
affect the basic ruling that there can be no payments by Argentina to
exchange bondholders without an appropriate payment to plaintiffs'.

In light of Argentina's official statements that the government will not
honor the court's decision and the country's 2005 'Lock Law' which
prohibits the government from re-opening the exchange or from conducting
any type of settlement with holdouts without prior authorization from
Congress, Judge Griesa decided that the stay should be lifted 'at the
earliest possible time' so there is more assurance against a possible
evasion. The Dec. 15 date 'gives some reasonable time to arrange
mechanics' and allow the Appeals Court to consider the merits of the
circuit court's clarifications on the two issues at stake.

According to the ruling, the payment due to the plaintiffs should be
made into an escrow account by Dec. 15 with the provision that it could
be adjusted by any modifications that the Court of Appeals may impose
subsequently.

The Argentine government is in the process of challenging Judge Griesa's
decision in the U.S. Appeals Court and has also announced its intention
to take the case to the U.S. Supreme Court if needed, although it is not
clear if the Supreme Court will agree to preside on the matter.

Fitch will continue to monitor how the case evolves and the Argentine
government's response in the coming weeks. A missed payment on exchanged
debt securities issued under NY law (including the GDP-linked warrants),
which remains uncured within the stipulated 30 days grace period, would
constitute a default event. In such a scenario, on expiry of the grace
period Fitch would move Argentina's FC IDR to 'RD' (Restricted Default)
and the bond ratings of the affected securities to 'D' (Default). On the
other hand, a positive resolution, under which the Argentine authorities
decided to pay the plaintiffs in line with the court ruling, and which
therefore allowed the sovereign to continue servicing its NY-law
external debt without interruption after the Appeals Court's final
ruling, would be reflective of its willingness to pay and lead to a
positive rating action on the FC IDR.

Fitch's downgrade of Argentina's local currency IDR reflects the
sustained deterioration of its credit fundamentals. The uncertainty
related to the impact of the U.S. Court ruling is likely to further
damage confidence and intensify political and social tensions in the
country and undermine growth prospects.

Argentina's economy has decelerated sharply in 2012 owing to the
increased state intervention. This has been highlighted by the
progressive tightening of capital controls, the nationalization of YPF
and the inability of certain provinces to access USD to repay their
dollar-denominated debt under local law. While the authorities have been
able to stabilize international reserves by progressively tightening
capital controls, this has come at the expense of increased economic
distortions. The sustainability of this strategy is also vulnerable to
international commodity prices, especially soy.

The concentration of power in the executive continues to undermine
policy predictability and contributes to a tense and polarized political
climate in Argentina. The recent massive protests indicate a general
public dissatisfaction with issues ranging from high inflation,
stringent FX controls, weakening infrastructure and corruption
allegations. The authorities' disregard for popular protest and their
rhetoric suggests that interventionist policies that lead to further
concentration of power and increase economic distortions are likely to
intensify. As a consequence, further deterioration in Argentina's policy
framework is possible, which could adversely impact the country's medium
term growth prospects.

The steady attempts by Argentine authorities to 'Pesofy' the economy,
the recent intervention in the insurance sector to redirect 15% of their
investments to real-economy projects and the recently approved financial
system reform are all indications of the trend towards further financial
repression or interventionist policies.

Sustained economic weakness that heightens fiscal pressures, which in
the context of limited financing flexibility could lead to significant
erosion of international reserves and greater monetization of the fiscal
deficit with adverse repercussions for inflation, would increase
downward pressure on the rating. A material escalation of inflation from
the already high levels could undermine Argentina's fragile equilibrium
as depreciation pressures would mount due to erosion of competitiveness.

Alternatively, improvement in the overall policy stance that leads to
sustainable growth and greater financing flexibility would stabilize the
rating. Improvement in the transparency of official data and
normalization of relations with creditors and multilaterals would also
buttress confidence.

Additional information is available at 'www.fitchratings.com'.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.

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